Fed Still Waits For The Right Moment

1976 WordsJun 19, 20168 Pages
Fed Still Waits for the Right Moment Ever since the first rise in the federal funds rate last December, the Federal Open Market Open Committee (FOMC) has been repeatedly frustrated in its attempt to continue policy normalisation. Firstly, tightening financial conditions in January forced the FOMC to embrace dovish policy rhetoric. Markets subsequently declared victory over the Fed, but they consequently embraced an overly-optimistic view about how monetary policy would unfold for the rest of the year. Secondly, there was a clear deceleration in economic activity in Q1 that frustrated the more hawkish FOMC members. Last week’s policy meeting was, therefore, always going to be the earliest opportunity for the FOMC to further raise its policy rate. The press release cited a slowing rate of improvement in the labour market and weaker capital spending as reasons for keeping policy on hold. Meanwhile, the financial press emphasised the scaling back of future rate hikes in 2017 and 2018. The terminal level of the federal funds rate is now envisaged to be 3%, a downward revision of 30 basis points. Meanwhile, the central tendency forecast range for long-term real GDP growth was lowered modestly to just below 2%. The FOMC remains committed to its 2% inflation target. There is, therefore, still an unusual discrepancy between the FOMC’s new estimate of the equilibrium real interest rate (1%) and long-term potential GDP growth (just under 2%). Is the Fed’s 2% inflation target too high?

More about Fed Still Waits For The Right Moment

Open Document